Federal budget coming next week: What will Flaherty cut?

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On the day Finance Minister Jim Flaherty announces the date for the 2013 federal budget -- it will be Thursday, March 21 -- the United Nations Human Development Index boots Canada out of its top ten because of lack of progress on education and increased inequality.

That should worry the government, but probably does not.

Inequality has not been a high agenda item for Prime Minister Stephen Harper and his colleagues.

On the other hand, the most recent economic growth figures for Canada have been anemic, and that should worry the government, whose brand is tied to "jobs and the economy."

Slower growth will mean lower tax revenues. Nonetheless, Flaherty insists he will keep to his pledge to eliminate the federal deficit by 2015.

To achieve that zero deficit the Minister has telegraphed that there will be even more spending cuts.

He has also indicated that he might try to find revenue by something he calls "closing loopholes."

Nothing that will sting high income Canadians

The government has, in recent years, significantly cut taxes for corporations, many of which are happily sitting on mountains of cash and not working very hard to create new jobs.

Bringing that tax back up, just a bit, could yield billions in revenue. But we will not see that next week.

In recent budgets we have seen other provisions that mostly benefit upper income Canadians, such as Tax Free Savings Accounts; but it is hard to imagine Flaherty backing away from any of those "loopholes."

One of the biggest and most visible "loopholes" is the Registered Retirement Savings Plan (RRSP) deduction, which allows all taxpayers to shelter at least some of the money they put away for their golden years.

The RRSP deduction has certainly encouraged significant savings over the years, but has also been a great boon to the so-called "financial services" industry.

That industry is really in the business of selling mutual funds laden with heavy fees, under the guise of providing “investment advice” to befuddled, hardworking Canadians. Those who watched their savings evaporate in 2008 know what that advice can too often be worth.

But leaving that aside, the RRSP measure has from its inception been structured as a deduction not as a more progressive tax credit.

Taxpayers deduct the RRSP contribution from their taxable income and reduce their tax owing accordingly, which means that, for the same dollar amount of RRSP contribution, the higher income taxpayer will get more money back than the lower.

For years, even some small-c conservative economists have been suggesting that the RRSP tax break should be a credit rather than a deduction.

The way that would work would be that for each dollar of RRSP contribution, everyone -- regardless of income -- would receive (for example) the same fifteen cent tax credit. That would be a fairer system, would have a modest redistributive effect and might even save the federal government money.

But don't expect that sort of initiative in next week's budget. It is not likely there will be anything that could even modestly offend higher income Canadians.

Oil and gas want $2 billion more from federal coffers!

It is, in fact, a mystery as to where the Finance Minister might try to close those loopholes.

No doubt, those in the private sector who might feel the impact of whatever Flaherty has in mind have already been given some kind of oblique heads-up. (It is, of course, against the law to expressly reveal to anyone what will be in the budget!)

And while the Minister is on the hunt for more spending cuts and loopholes to close, many powerful voices have been lobbying him to create yet more loopholes.

The oil and gas industry, for example, wants the Government to extend the same capital cost allowance measures to natural gas liquefaction plants as it does to the manufacturing sector.

As it stands now, when the oil and gas folks build those plants they can claim a capital depreciation of 8 per cent per year.

The capital depreciation allowance for manufacturing is 30 per cent a year -- designed, notionally, to encourage investment in high value-added facilities that provide lots of jobs. The tax system does not see liquefaction plants as manufacturing, but as part of the gas delivery system.

The oil and gas folks say their liquefaction plants should be re-classified as manufacturing, at a cost of about $2 billion in foregone federal tax revenues.

The gas industry recognizes that it does not provide anywhere near the employment levels of "real" manufacturing, but says it needs the tax break to compete with the United States and other gas exporters.

The argument is similar to that for the Keystone XL and Northern Gateway pipelines. It goes something like this:

Market conditions are favourable now

There is a big demand for fossil fuels today, but it might not last. Before we know it, clean and renewable energy sources might start replacing dirty oil and gas.

And so, we have to strike while the iron is hot, and get our fossil fuels to export markets as soon as possible.

The government has shown that it is very favourable to this line of argument, but will it work in the case of liquefied natural gas, even if it costs $2 billion at a time when the government is strapped for cash?

If Flaherty were to decide to give away an additional $2 billion to the oil and gas industry, he would, of course, have to find an additional $2 billion in spending cuts and loophole closings.

That does not look like an easy feat, today.

We'll know much more in one week's time.

A budget by any other name is ...

There is one thing we do know for sure about the coming federal budget. As with all the previous Harper government budgets, it will not be officially called a "budget."

It is, if you please, an "Economic Action Plan."

Thursday's announcement of this year's version of the "Economic Action Plan" elicited a fair bit of derision, on Twitter, from journalists who cover Parliament.

One mocked the over-the-top branding strategy, and tweeted: "The Harper Government™ would like u to call their 2013 budget the Economic Action Plan 2013™"

Branding aside, and more ominously, we can also predict with some certainty that the "Plan" will include all kinds of measures that have no place in a government's annual statement of fiscal policy.

In the two previous omnibus budgets the Harper government took on: environmental review and protection, fisheries, the voluntary sector, immigration, and the rules governing employment insurance -- to cite just a few examples.

What surprises will Flaherty have for us next week?  

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